Last month unveiled notable evidence suggesting that while some aspects of life may seem to improve, the reality for others appears to be worsening. For instance, borrowing by Spanish banks from the ECB reached a staggering 227 billion euros in March. This money was subsequently loaned to the Spanish government through the purchase of bonds.
One may wonder where the ECB sourced this substantial amount. Understanding the secrets behind a magician’s tricks often spoils the illusion. Nevertheless, this cash injection will offer temporary relief. The banks can maintain their solvency, and the government can stay afloat… at least for now. However, this approach may lead to exacerbated troubles in the future as the banks and the government entwine their financial fates, sinking deeper into debt.
In the United States, the situation mirrors this absurdity. Following a scandal where Secret Service agents were caught mishandling payments to Colombian workers, President Obama took to the podium to criticize speculators for driving up oil prices, thereby increasing gas prices at the pump. It’s election season, after all, and deflecting blame onto oil traders can be a strategic move to garner votes.
Yet President Obama conveniently overlooked the fact that rising oil prices—and even the cost of Colombian courtesans—are driven by a declining dollar. Since mid-January, the dollar, gauged by the dollar index, has depreciated by almost 2.5 percent. During the same period, oil prices have climbed approximately 2.9 percent.
But what’s causing the dollar’s decline? Perhaps one underlying reason is simply that there are too many dollars in circulation.
Shouldn’t Everyone Be Rich?
Contrary to popular belief among monetary authorities, simply increasing the money supply does not equate to increasing wealth. In earlier times, when the monetary system was anchored in gold, it took a gold rush to enhance the money supply. Yet, even major gold discoveries did not automatically yield wealth for all.
Take, for instance, the mid-to-late 1800s during the gold rushes in California and Australia. The influx of gold significantly boosted the global gold-based money supply. This was the most substantial monetary expansion since Spain conquered the New World three centuries prior. While some individuals amassed fortunes from mining, society at large did not experience a corresponding increase in wealth.
This begs the question: with all this new money circulating, shouldn’t everyone be enjoying prosperity?
Contemplating this paradox, 19th-century English economist William Stanley Jevons posed a profound question: “Have the Gold Discoveries added to the Wealth of the World?”
Here’s Jevons, circa 1884, shedding light from over a century ago…
A Wrong Against the Human Race
“If wealth is defined as that which is beneficial and desirable to mankind, it is safe to say that the mere gold mined from Australia and California represents a significant and almost dead loss of labor.
“A century or more ago, it was common to view gold and silver as the only indicators of wealth, as they served as measures and mediums of wealth. Today, it is more accurately understood that gold is one of the least desirable forms of wealth in and of itself, with its true value as money deriving from its scarcity, which enhances its significance and minimizes the physical burden of carrying it as currency.
“Estimating the indirect benefits of these discoveries—such as the creation of colonies, the spread of English culture, and the stimulation of trade—is no small task. However, it seems to me that gold mining has always appeared to be a net loss of labor for society at large—a disservice to humanity, similar to the harm inflicted by a government that excessively issues and devalues its own currency.”
This perspective is strikingly clear: mass currency creation does not lead to a more prosperous life for all. Yet this vital understanding, as articulated by Jevons, appears to have been overlooked by today’s central bankers, who—free from the constraints of needing a significant gold discovery—believe that increasing the money supply will generate wealth and prosperity.
“The U.S. government possesses a technology known as a printing press (or in today’s terms, its electronic equivalent), which allows it to produce an unlimited number of dollars at no cost,” remarked Bernanke in 2002.
Fast forward ten years and trillions of dollars later, and the results are glaringly evident:
High unemployment, rising prices, and an unsustainable level of debt.
Sincerely,
MN Gordon
for Economic Prism
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